Taxes and Rental Properties

If you’re considering investing in a vacation rental property, you could be in store for more than just owning a little slice of paradise. You may also gain some tax benefits, but not without being subject to a few rules and limitations if the goal is to maximize those benefits.

When you own vacation rental property you have the possibility of earning passive income and having your property appreciate over the time of ownership. With these positive results, you’ll want to be sure you’re buying property that will yield these results and that you take full advantage of the tax benefits as well. Your local Realtor will help you to determine which property fitting into your criteria will be the best investment to help you reach your goals. Your local Realtor will examine your wish list and know the inventory and rental restrictions in each area of town. This will help you to select the most lucrative option for your investment dollars. Talk to your CPA or tax professional about advantageous tax deductions as well.

You might be able to deduct the following items when you own a vacation rental property:

• Fees paid for property management
• Utility expenses
• Supplies provided as guest amenities
• Occupancy taxes paid to local municipalities
• Property insurance premiums
• Mortgage interest paid on the property if you took out a mortgage on the property
• Lawn care
• HOA fees
• Housekeeping expenses
• Travel to and from the property for upkeep
• Furnishing the property
• Appliances for the property
• Marketing expenses

If you’re planning to use your investment property part of the time or plan to take your vacations at the property as well, remember to discuss the tax laws regarding usage limits with your tax professional. You may have heard it called the “14-day rule”, but different usage scenarios may have different rules that apply. For example, if you “live” in the property you’re renting out to others, there are limits to “rental” expense deductions, and “living” in the property can be based on either the number of days used (no more than 14 days) or a percentage of time spent (10% of total days rented out at fair rental value) and so your exact numbers can vary based upon your usage scenario.

On the other hand, if you’re planning to only rent the property occasionally and you rent it for less than 15 days in the tax year, you may not be able to claim that as rental income or use the deductions from it. If you are only renting a portion of the property and living in the other portion, you may need to divide the expenses based on the number of days used.  Finally, while the goal is to meet all your expectations and have a very successful vacation rental property, sometimes things don’t work out the way they are planned. If this happens, all may not be lost. This scenario is a good opportunity for you to speak with your tax professional about losses. You may be able to claim certain losses on your taxes as well.

The best place to start is to speak with your local Realtor about investing in the desired property type and have them assist you with finding what you’re looking for. Your local Realtor will also be able to help connect you with vacation rental management companies and resources that can provide you with clear expectations of income projections and expenses for the property you choose. Take this information to your tax professional and financial advisor to determine if this property will be advantageous for you to pursue. With this as your search structure, you’re setting yourself up for a safer investment going forward. For more information about tax rules and renting vacation homes consult with your CPA or tax professional and visit irs.gov